Is this a bear market rally ? Or, is the March low the bottom? This is the debate of the time. Personally, I believe the March low is the worst.
Having said that, I think all traders should keep an open mind. We do not trade by “forecast”, rather, we trade by the “sign”. If the market starts to move up from the market low as forecasted, then a reversed head and shoulder pattern can be expected. With that in mind, I would make my trades accordingly.
Now the left shoulder and the head have been in place, I am expecting a right shoulder to be formed next. On the other hand, if the market moves down further and even break the March low, then all bets are off .
First attached is the daily chart of S&P 500. The index has moved up from the downward trend. This is a very positive sign.
Also attached is the weekly chart. The weekly chart also shows the breakout from the downward trend. If the index pulled back from here down to 800, that would be the perfect point to get in . A reversal head and shoulder pattern is forming.
I think this is what most money managers are planning. As such, this has been the action of the market.
Some friends of mine are worried about their gold holdings. Understandably, Gold has retreated from the high of nearly $1000 to below $900. There are more bearish comments from the analysts recently. Furthermore, it is very hard to “estimate” the value of gold.
Gold holdings are not like IBM that generate earnings to support the price. Gold is not even like commodity that there is always the fundamental “need” to support the demand.
Gold is simply a yellow metal that is of little practical use.
Attached is the weekly chart of the gold ETF, GLD.
Here is my thoughts to share with those of you who are worried.
At this price, GOLD could go down to as low as $770. However, there is equal probability it could go up to $1000. I think the chance for each case is about even.
What is to be considered, though, is the longer term.
If GOLD should drop to $770, I think the big money would come in and life it up to $880 very quickly.
On the other hand, if GOLD should move up to $1000 and up, chances are that it would never come back to $880 anymore. $1000 gold would be history , just like $35 gold is now a distant history.
I think the Risk/Reward favors holding GOLD at this price.
April 1 (Bloomberg) -- U.S. stocks advanced for a second day as sales of existing homes unexpectedly increased and a manufacturing gauge topped economists’ estimates, bolstering optimism that the worst of the recession is over.
So reflected on the stock market.
However, the pictures that stole the media attention from the G20 meeting are the riots of massive protesters. These people who demonstrated on the streets to protest are citizens of the once wealthiest nation in the world.
The attached picture is a scene in London. I must think again if the worst of this financial crisis is really behind us.
March 18 (Bloomberg) -- The Federal Reserve opened a new front in its battle to bring down borrowing costs across the economy, pledging to buy as much as $300 billion of Treasuries and stepping up purchases of mortgage bonds.
Hmm…and there is the additional $600 billion that the Fed has already committed to buying of mortgage-backed securities and bonds sold by government-sponsored housing agencies. Through emergency loans and liquidity backstops, U.S. central bankers have expanded Fed credit to the economy by an unprecedented $1 trillion over the past year.
Ok…so what is this?
Basically, the US government wants to rescue this economy with a lot of US dollars. However, they can only borrow so much from the private sectors and foreign governments. After all, Chinese Premier Wen Jiabao already voiced concern and said that he is “worried” .
No problem. The Federal Reserve is now out on the front, and they are willing to lend as much money as needed to the US government. After all, the Federal reserve has “UNLIMITED” amount of money. That is the beauty of it! The world’s currency is US dollar, and we own the printing machine.
Of course, the Federal Reserve , basically the central bank of the world, must maintain its position as fair and neutral. So they do not just “give” the trillion dollars to US government, they simply “lend” the money, and they “expect” the money to be returned.
Now, how does US government plan to return that money to the central bank ( of the world )? Obama said that he would tax the wealthy “AFTER” this crisis is over. So, at least, the US government is still maintaining its responsible principle.
In the mean time, though, Wen Jiabao is still worried.
That is the primary trend that is going under this financial turmoil now.
Attached is the weekly chart of Freeport Mcmoran Copper. Copper gets a nickname as “Dr. Copper” because its price action best forecasts the trend of overall economic activity. So, what does Dr.Copper say about the economy? I think it says, the economy fell hard last October, and we are crawling out of it.
Many sectors fell to new lows since last October, but FCX has moved up some impressive 50% since then. This could be an important divergence . The market continues to make new lows, but Dr.Copper is telling something in the opposite direction.
Majority of economists and CEO’s are talking about a recovery in 2010 or later. However, Dr.Copper seems to indicate that the recovery could come sooner.
WASHINGTON, Feb. 23 (Xinhua) -- U.S. President Barack Obama vowed on Monday that he will cut his country's budget deficit by 2013.
"Today, I am pledging to cut the deficit we inherited by half by the end of my first term in office," Obama declared, as he opened a "Fiscal Responsibility Summit" at the White House.
Apparently, Obama administration knows how important it is for US to keep its dollar as the reserve currency of the world and they mean to keep it that way. Indeed, I start to think that, US might just sacrifice its growth to save the status of reserve currency for the dollar. After all, it comes so handy and so secure to own the printing machine of the world’s money.
That news weighed on Gold.
Attached is the weekly chart of GLD.
The strong upward rally of GLD was abruptly checked and reversed. Now GLD is heading down. From the surface, this looks like a regular short term correction with a hard support at the level of $88. However, deep in MJ’s mind, there is this doublet: Is the 10 year old bull market in GOLD finally over?
I think NOT.
Obama’s plan is to cut the deficit by raising tax , not by cutting spending.
In other words, the economy will stay at the expanded stage.
How about the billions of dollars on the “balance” of the federal reserve? Those might stay there forever. In other words, the printed money would move around in the world. Those would never be returned. Why? It is easier that way.
In short, it is much less resistance to inflate out of debt.
My conclusion: The bull market in GOLD is still well and alive.
After walking in the rain for 2 hours, you feel a bit of sore throat. You take a hot bath, drink a lot of fluid, and take double dose of vitamin C. After one good night of sleep, you would likely feel total healthy again.
However, if the sore throat is getting really bad, and you feel body ache all over the place , chances are that, the virus inside you has accumulated to a critical mass that no medicine can ever suppress it from a whole brown bad cold.
The only way for your body to recover is to wait it over. The only advice from the doctor is for you to rest. You must endure more weakness, more pain, some fever, …until finally, the virus attack runs its full complete cycle.
I think that is what we have on this deep recession. It looks more and more likely that the stimulus plan is only to keep the pain more tolerable. We still must let this down turn run its complete cycle.
As for the equity, I am afraid that we have not seen the bottom until the day of capitulation…when all the investors throw in their towels.
My friend David sent me a news letter that he deems “respectable” with a good track record. The news letter says that, the Gold rally is a bubble. He urges his readers to sell Gold.
In the news letter, he sites 3 reasons that Gold is a sell at this price.
(1) We are in a period of deflation, not inflation.
(2) The US government does not “print money”, they just “borrow” money.
(3) The world has as much gold as the people wants, needs, or uses. The supply far far exceeds the demand.
Let’s keep an open mind and review his points:
(1) We are in a period of deflation, not inflation.
True, we are in a period of deflation, not inflation. During the period of deflation, all prices should come down, not up. For the “commodity” part of Gold, the value should also come down as well.
However, a big part of Gold’s value is the “currency” part. Gold is a form of currency, just like US dollar or Japanese yen. Actually, Gold is the most fundamental form of currency. Just as recent as 30+ years ago, government was allowed to issue its paper currency based on the amount of Gold reserve. Basically, gold is the real money. US dollar is just an “ I owe you this much gold” note.
As such, in a period of deflation, values of money increases. So is Gold, the real money.
(2) The US government does not “print money”, they just “borrow” money.
If the government borrows the money and keeps it in the safe, then yes, no new money will be printed. But , when the government spend it, and they will, that money will be printed. Say, government borrows 100 billion US dollars from China and spend it. The business that render the service or goods to the government would receive 100 billion dollar bills. In the mean time, China still has 100 billion dollar balance in the account.
(3) The world has as much gold as the people wants, needs, or uses. The supply
far exceeds the demand.
Does the supply of US dollar far far exceed the demand? Does the supply of Reminbi far far exceed the demand ? The answer is no. People want as much money as possible. The question really is: How is the Gold currency comparing with US dollar? Which currency is more trustable ? Which currency is stronger?
At this juncture when the central banks of world keep printing money ( Yes, they do, in the form of Debt to the government ), which currency is more trustable?
US dollar? Or Gold?
Feb. 9 (Bloomberg) -- Treasury Secretary Timothy Geithneris seeking to draw investors into the U.S. financial-rescue program, aiming to add private funding as a new component of proposals to address the toxic debt clogging banks’ balance sheets.
So the brightest minds of the nation are working hard to halt this financial tsunami. In the mean time, many argue that, the hole is too big for the government’s stimulus plan to fill.
This is the trillion dollar question of the time. ( hmm..since when that we talked about trillion like it is nothing big? ) Is the stimulus plan going to work? If it is, then we might have seen the bottom of the US and global equity market. However, if the plan should fail, as many suspect that it will, then we are going to see another big leg down on the stock market.
Of course, the nation and the world would be in serious crisis. Maybe there would be wars. Maybe USA would turn socialism, just like Europe and Canada. Maybe the Dow would come down to 5000, and Gold would rally to 5000, when the ratio of DOW/Gold would be 1 again like it was in 1980.
All that is possible if the stimulus plan should fail.
First chart is the S&P500 daily chart. The short term trend is up, but the index is right at the bottom of the trend. Is the S&P going to rebound as it is oversold? Or, is it going to break the trend line and start a new leg downward trend? Market is at the blink.
Second chart is the S&P500 weekly chart. The intermediate term trend is up, but again, the index is at the bottom of the range. The market is telling the same thing: it is over sold, but we are very nervous.
Finally, the monthly chart. This is a long term picture of the S&P500. We are now sitting at the low of the post 911 bottom. The market is wondering: the bubble is burst, and all the values created since the post 911 low have been wiped out, but, is that all? Or, the damage is so severe that, wiping out all the value simply is not enough, and there will be more damage to come?
This is the time of crisis as well as opportunity. The mission now for the stock traders is to preserve CAPITAL. However, preserving CAPITAL is only half of the task. The other half is to invest the CAPITAL in the right places when the bottom finally arrives.
In 1929 when the great depression started, Kennedy's fortune was estimated to be $4 million. By 1935, his wealth had increased to $180 million. According to Time Magazine, Kennedy survived the crash “because he possessed a passion for facts, a complete lack of sentiment and a marvelous sense of timing.”
First chart is the daily chart of Toll Brothers, one of the nation’s largest home builders.
What you see is a stock that trades in range. It is moving up and down , waiting to see the next direction.
The second chart is the weekly chart of Toll Brothers. Now you see the real picture. The housing market is bad, very bad. If on any day the market moves up, it is based on “hope” that the worst is over.
The third chart is the monthly chart of Toll Brothers. Somehow this long term trend chart indicates some positive sign. It tells that, if America continues to be the best place in the world, then we could assume that the worst is over.
Stock market is the leading indicator of the economy. Housing sector is the leading indicator of this market. Is America still the best place in the world? President Obama certainly has brought in the first positive confirmation.
All traders learn about some technical analysis. In technical analysis, the most common knowledge is about “resistance” and “support”. There are patterns where most likely (70%) the stock would be subjected to heavy selling, hence the upward moving stock price might encounter some “resistance”. There are also patterns where the stock is most likely ( 70% ) to be subjected to heavy buying , hence the downward stock price might find some “support”.
To be a winning trader, though, you must know better than that. Now most people know about resistance and support. Then, you must think, why would some people sell the stocks near the support? Or, on the other direction, how could there be any buyers near the resistance?
Why? Do they know something that you do not?
You must answer that question before you take advantage of the support /resistance statistics.
Attached is the monthly chart of S&P 500. Obviously, all eyes are watching closely the strong support at 800 level of S&P500.
Attached is the weekly chat of US dollar in terms of GOLD, the real money.
After a wild panic buying due to the credit crunch, US dollar is still under the primary down trend in terms of real money, Gold. Actually, the recent peak of US dollar index looks like a head and shoulder pattern to be formed.
We would watch carefully.
What is going on with the economy and the bail outs? Ok, I would explain it so that a high school kid could understand.
The economy is run by the capitol, the money. Where is this money come from? Majority of this money come from debts. Our banking system is lending out 90 dollars as long as they have $10 in the deposits. Basically, we have a $100 economy while we have only $10 capitol. That is perfectly fine…as long as the $90 borrowed money is producing value of $90 or more in due time.
Where is that $90 spent? In business trading, construction, factory building, retail inventories, school building, road construction, or home buying. Generally speaking, the $90 borrowed money would be returned in due time through production, business income, government tax revenue, or your house appreciation. As long as the $90 debt is producing $90 value in due time, the system is balanced, and without inflation.
Now here is the problem. Due to the housing bubble, our banks now have only $5 left in their deposits. Therefore, the debts that can be borrowed from the banks is reduced to $50. Suddenly, the “money” in the system is reduced to $50 in a short time. As a result, the values of many assets must be adjusted downwards. So comes the most horrible nightmare : deflation.
How to solve this problem? Here is plan: The governments would borrow money from the federal reserve and pump that money into the system to make up for the lost amount.
If everything goes perfectly, the governments would invest the borrowed $50 and temporarily keep the deflation in check. In due time, the invested $50 would produce goods that is worth $50 or more, and therefore, there will be no inflation. The government would get the money back in tax revenue and balance the budget eventually.
That is the perfect case. What about the worst case?
Say, the $50 that the government invested produced no goods at all. All the $50 was spent to produce mountains of stuff animals that nobody wants.
Now, we would have $100 in the system but we are only producing $50 of useful goods. More money than the goods spells inflation.
I think what would really happen is in between. The $50 would produce some values, but not all of it. As a result, there would be some inflation after all the money is spent.
One wildcard in this analysis: Is the amount of bailout that Obama proposed enough to make up all the money that was lost? Some economists argue that the 1.3 trillion dollars that Obama proposed is not enough. If this is the case, then deflation would continue to push down all asset values.
I would talk about gold in my next post.
Attached is the weekly chart of US dollar index. Starting last summer, there was a wave of panic buying into dollar. After the massive bail outs from the central banks, US dollar retreated to 80.
In recent weeks, dollar is moving up sharply again. Is this another wave of panic buying?
I do not think dollar can reach new high. The worst is a double top at 88.
With less than 8 days to remain on his job as the States Secretary of Treasurer, Henry Paulson has been taking numerous exit interviews with the financial media, including one with Maria Bartiromo of CNBC.
In 1970 Paulson received a Master of Business Administrationdegree from Harvard Business School. He joined Goldman Sachsin 1974. In 1998 he succeeded Jon Corzine(now Governor of New Jersey) as its chief executive. His compensation package, according to reports, was US $37 million in 2005.His net worth has been estimated at over US $700 million.
Paulson was nominated by U.S. PresidentGeorge W. Bushto succeed John Snowas the Treasury Secretary on May 30, 2006 and officially sworn in at a ceremony held at the Treasury Department on the morning of July 10, 2006.
When asked about if the US could afford the massive bail out plan , Paulson ‘s answer has been consistent: “ We can not afford not to have a bail out plan.”
In plain English, the States Secretary is saying: “ I know the consequence is bad, but we do not have a choice.”
Let’s assume that the bail out plan would be successful. Then I must start wondering: What is that “bad consequence” that everybody agrees on?
During times of deflation, all the “values” are re-adjusted. What is the worth of your house? Down 30%. What is the worth of Microsoft? Down 45%. What is the worth of shipping to overseas? Down 90%. What is the worth of oil? Down 78%. All that re-adjustment occurred in just less than 3 months! Basically, all the money (to offer to buy house, Microsoft, Shipping, or oil ) just disappear. As there is less money in the world, all values are to be adjusted.
I have been asked many times questions like this: “ Where has all the money gone? How could all the money just evaporated?” I think the following clip ( http://www.youtube.com/watch?v=PHBtnzxJJ_4 ) is a good education to this question. I would urge all my readers to watch this video clip. It is long ( 45 minutes), but it would help you understand money.
Now that all the private sectors are cutting back on their debts. The US government is ready to jump in to rescue the world. US government is poised to borrow 1.3 trillion dollars next year. So money would be there again. The “values” of things would be restored again…but only for things that are really of value.
It is our job, the stock investors and traders, to put the money in those things that are of “real value”. Do your job, and you would be handsomely rewarded. If you do wrong, you would be punished severely.
Jan. 7 (Bloomberg) -- U.S. stocks slid, erasing most of the market’s 2009 gain, as a private report showed employers cut more jobs than estimated in December and companies from Alcoa Inc. to Intel Corp. spurred concern the profit outlook is worsening.
Today’s down market is a reality check. The market realized that Obama could not simply spend the nation out of recession. That would be too easy.
The world seems to agree to print out more money all together. The price of doing that would be run away inflation in the future. If US is going by the accounting rule, then all the budget deficit would be treated as “borrowed money”. We would eventually pay back the money, plus interest. It seems obvious that US could never afford to pay back.
I think the result would be balanced. US citizens must lower their standard of living. US dollar would decline some more until the US manufacturing can compete again.
Yes, manufacturing. I think it is about time for US citizens to roll up their sleeves and get their hands dirty again.
Day DeMark: DeMark On Day Trading Options
A great book in trading options. Do not miss this book even though you do not day trade.
-MJ
A. J. Frost: Elliott Wave Principle: Key To Market Behavior
A must read in the school of "technical analysis".
-MJ
Steve Nison: Japanese Candlestick Charting Techniques, Second Edition
The Japanese wine makers applied their "technical analysis" several hundreds years ago to predict the price of rice.
-MJ
Benjamin Graham: The Intelligent Investor Rev Ed. (Collins Business Essentials)
"By far the best book on investing ever written."
-Warren Buffett
Jeremy J. Siegel: The Future for Investors: Why the Tried and the True Triumph Over the Bold and the New
A new look at growth stocks...
-MJ
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